Buying time for Italy, Spain a top priority

Future of euro remains uncertain

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In a televised address yesterday, Angela Merkel said her government would do everything it can to help the euro.

By Patrick DonahueBloomberg News
January 02, 2012

MUNICH - European leaders return to work this week seeking to buy time for the Spanish and Italian governments to wrest control of their debt and rescue the single currency from fragmentation as the region’s crisis enters a new year.

Some $203 billion in debt will mature in the 17-member euro area in the first three months of 2012, according to UBS AG. By the end of that period, leaders have pledged to draft a stricter rulebook on reining in debt.

Germany’s chancellor, Angela Merkel, and France’s president, Nicolas Sarkozy, will meet in Berlin next Monday to flesh out the details.

“The path to overcoming this won’t be without setbacks, but at the end of this path, Europe will emerge stronger from the crisis than before,’’ Merkel said in a New Year’s television speech. She said that her government will do “everything’’ it can to bring the euro out of the slump.

On the 10th anniversary of the introduction of the euro, which replaced national currencies, the euro for the first time had two consecutive annual losses against the US dollar and plunged to a record low against the yen. European leaders are struggling to hold the monetary union together in the face of credit downgrades, emerging splits in the European Union, and a looming recession that could compound rising debt.

On Friday, Spain’s new government said 2011’s budget deficit would reach 8 percent of output, more than the previous government had projected and more than the 6.9 percent expected by economists surveyed by Bloomberg. Prime Minister Mariano Rajoy responded by unveiling a new package of spending cuts and tax increases.

Still, the key to the euro’s survival may lie with Italy, the group’s third-largest economy and the second-most indebted, after Greece. The government must repay 53 billion euros in debt in the first quarter, about a third of the euro area’s whole scheduled amount, after Prime Minister Mario Monti passed an emergency budget package aimed at curtailing borrowing costs.

Italy’s 10-year yield ended 2011 near the 7 percent mark that led Greece, Ireland, and Portugal to seek bailouts. Spain’s equivalent yield finished the year just above 5 percent.

“If the Italian yields start to rise, you could quickly turn a manageable situation into an insolvent one,’’ said Michael Spence, a professor of economics at New York University and a Nobel laureate. “Italy needs time, and Europe needs to help buy them some of the time.’’

Germany’s finance minister, Wolfgang Schaeuble, echoed that, telling the Bild newspaper that European rescue funds can only “buy time’’ before indebted states take “the necessary measures to win back confidence.’’

Sarkozy said his government will turn from budget tightening to economic growth and unemployment in 2012. He faces a reelection contest in May. He will meet Friday with Italy’s Monti in Paris.

In a New Year’s message, Greece’s prime minister, Lucas Papademos, said his nation would confront a difficult 2012 and the “next three months will be particularly crucial.’’ Appointed Nov. 11, he aims to secure loans under a 130 billion-euro bailout for Greece, agreed to in October by European Union leaders, before elections are held.

Fiscal and monetary efforts could be hampered by a shrinking economy in the euro area, which would crimp tax revenues and fuel unemployment. The economy of the 17-nation area will shrink by about 0.7 percent this year, IHS Global Insight says.